Cascade Commentary

09 Feb 2018

0.50% bank rate maintained as MPC signals May rate rise

The Bank of England Monetary Policy Committee (MPC) voted unanimously this week to maintain Bank Rate at 0.50%. They voted unanimously to leave the purchase of stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £10 billion while also voting unanimously to maintain the stock of UK government bond purchases, financed by the issuance of central bank reserves, at £435 billion. Committee members reached their decision amid a backdrop of positive economic data globally but warned that future rate rises may lie sooner than previously anticipated.

Acknowledging recent volatility fuelled by expectations of a rate rise in US markets, the February 2018 Inflation Report noted that the global economy is growing at its fastest pace in seven years with supportive economic conditions in global markets. The UK economy has in turn enjoyed a boost in Net Trade following the depreciation of sterling in the aftermath of the vote to leave the European Union (EU), supported by solid global demand. UK growth has been revised upwards as strong global conditions continue to bolster UK exporters.

This solid global demand is causing concern for the MPC however who stated that interest rates may need to be increased sooner than anticipated to dampen the effect on UK inflation, which sat at 3.0% in December 2017. Committee members unanimously agreed that UK inflation is likely to remain above its 2.0% target and that this cannot be tolerated for the next three years. The language used in the minutes released is broadly similar to that seen in September 2017, which preceded the first rate rise in over a decade in November 2017.

Sterling and gilt yields increased following the MPC's hawkish tone while the FTSE 100 fell in expectation of a rate rise. The market expects for interest rates to be increased in the May 2017 meeting but debate has ensued over how many rate rises will be required to push inflation down towards its 2.0% target, something that was not indicated by the MPC.

Should you wish to learn more about how deposit rates have been affected following this announcement, please do give us a call on 0191 4813777 and we'll be happy to discuss further.